A “Lady Bird Deed” is another name for an enhanced life estate deed, which allows a property owner to transfer property at death without the necessity of probate. It is nicknamed “Lady Bird” because many people think that President Lyndon B. Johnson conveyed some land to his wife using this type of deed, although there is no evidence that actually happened.
How Does It Work?
An enhanced life estate deed allows a property owner to transfer a remainder interest in a home to the ultimate beneficiaries, but reserve a life estate (a right to occupy and use the property during his or her lifetime) and the right to sell or mortgage the property, or change the remainder beneficiaries at any time. If the owner dies without revoking the transfer, the property passes outright to the remainder beneficiaries without the need for probate.
How is an Enhanced Life Estate Deed Different Than a Traditional Life Estate Deed?
With both the enhanced life estate deed and the traditional life estate deed, a property owner transfers a remainder interest in the property to the ultimate beneficiaries and retains a life estate. However, a property owner using a traditional life estate deed does not reserve the right to sell or give away the land without the consent of the remainder beneficiaries. The enhanced life estate deed allows the property owner to reserve those rights.
Benefits of Enhanced Life Estate Deeds
Enhanced life estate deeds offer many advantages over traditional life estate deeds:
- They provide homeowner the flexibility to change the remainder beneficiaries at any time.
- They allow the homeowner to sell or mortgage the property without the consent of the remainder beneficiaries.
- They protect the property from the creditors of the remainder beneficiaries during the homeowner’s lifetime.
- Because the owner of the property retains the right to take back the property during his or her lifetime, the transfer will not count as a gift for federal gift tax purposes. A transfer of a remainder interest with a traditional life estate deed may trigger gift taxes if the value remainder interest in the property is greater than the annual gift tax exclusion.
- They preserve the homeowners ability to immediately qualify for Medicaid benefits. Transfers of assets within a “look-back” period may disqualify applicants from immediately qualifying for benefits. However, executing an enhanced life estate deed is not considered a transfer for Medicaid purposes because the homeowner retains the right to sell the property or revoke the deed.
Beneficiaries Receive a Stepped-Up Basis
Because property will remain a part of the grantor’s estate, the cost basis of a property transferred using an enhanced life estate deed would be “stepped-up” to the value of the house on the date of death. This may significantly reduce the amount of capital gains taxes owed when the property is sold.
Potential Problems With Using Enhanced Life Estate Deeds to Transfer Property
I worked with a client recently whose mother had executed an enhanced life estate deed transferring a remainder interest in her property to her children.
The property was mortgaged, so after her death, the children contacted the mortgage company, a large bank, to assume the mortgage. Employees of the assumption department, who were based overseas, were not familiar with enhanced life estate deeds and suggested that the conveyance may have triggered the mortgage’s due-on-sale clause. I was able to point them to the federal law that prohibits mortgage companies from enforcing due-on-sale clauses when property is transferred to the borrowers children or spouse. Eventually, someone from their legal department took over and the matter was resolved in my client’s favor.
I’m sharing this experience because if there is an outstanding mortgage on the property, and the property is not being deeded to a spouse or child, there is a chance that the mortgage company could claim that a conveyance with an enhanced life estate deed triggered a due-on-sale clause. Due-on-sale clauses allow the lender to declare the entire balance is due immediately if ownership of the property is changed. Violation of the contract may be grounds for foreclosure.
Would it matter if the property had been transferred to someone other than a spouse or children. I don’t think so. Federal law prohibits the lender from exercising the due-on-sale clause when someone inherits a piece of property. The mortgage company may argue that the deed caused a change in ownership when it was signed. However, since an enhanced life estate deed is completely revocable and modifiable, it can be argued that the beneficiary’s interest would not vest until after the homeowner dies. Nevertheless, to avoid any problems, you should check with your lender, and confirm in writing that they will not invoke the due-on-sale clause if you plan to to transfer the property to anyone other than a spouse or child.
Additionally, some title companies who may not be accustomed to seeing enhanced life estate deeds may be reluctant to insure a title transferred in this way without the remainder beneficiary joining in the transaction during the life of the life tenant or when the remainder beneficiaries wish to sell the property after the death of the life tenant. However, not all title companies will refuse, especially as more people use enhanced life estate deeds.